As we enter an ever-increasing inter-dependence upon nations in the global supply chain, there is that inevitable contrary push to achieve self-reliance. There is therefore this lingering Israel Iran war, that threatens one more time the global economy.
Macroeconomic Implications for India
Where do we go from here? It’s difficult to connect the dots because of the myriad inter-layered issues of attack and retaliation, anger and restraint. With the US standing clearly with Israel, its long-time strategic and military partner, all bets are off and things could move from bad to worse. It needs, however, no clairvoyance to perceive that there are multiple factors at play in the real world besides the raw physics of production. At the global level, this flare-up has ignited fears that make the overall situation grim, the recovery ascent difficult and the Fed rate cutting cycle extended. This sabre-rattling has wide-ranging ramifications and repercussions across geographies, economies and sectors with volatility in bond and equity markets though temporarily. Bond prices will fall, cost of credit will rise for companies, crude price will rise and stock markets will fall both because of reduced profitability of the corporate sector and heightened uncertainty. A marked reduction in oil supply and consequently surging crude oil prices would raise domestic inflation and interest rates could remain persistently high and “sticky” for long. The disconcerting mix together with the tortuous path to recovery supports the safe-haven dollar and gold.
Bottom line: Greater Impact on Sector Specific Companies
While surging oil prices in the aftermath of the Iran-Israel war have a cascading macro-economic impact across sectors that could trigger a sell-off, oil-based sectors like automobiles, transportation, aviation, paints, tyres, cement, and chemicals could take the greatest hit. The market could be disrupted by the war-related risk but hopefully, the supply-demand oil dynamics would continue to be largely unfettered. The Indian stocks with an Israeli connection include Adani Ports, Sun Pharmaceutical, Dr. Reddy’s and Lupin, NMDC, Kalyan Jewellers and Titan. Further, oil marketing companies could be adversely impacted. The war could slacken India’s plan of building an India-Middle East-Europe Economic Corridor as reflected in the prices of railway stocks like IRCON, Jupiter Wagons, and RVNL.
With crude oil output of almost 3 million barrels per day (mb/d) i.e., about 3 % of the global production, Iran is a major oil producer and exporter and more importantly, 20 % of the world’s crude oil supply passes through the Hormuz Strait (60 % of Indian crude supply is accounted for by the Hormuz Strait), there could be a ‘super-spike’ raising crude oil prices per barrel per day raising it from the present level of US$ 78 to US$ 80 and even to US$ 100, depending on the nature of the events. This is not as far-fetched as it may apparently seem. For, supply disruptions in Iraq and Venezuela triggered a bull market in July 2008 with oil prices zooming to $145. In the event of major supply disruptions in the global oil market, OPEC+ might consider reducing voluntary cuts and increasing production.
In the case of the Indian economy, heightened oil security risks and concomitant surge in oil prices would negatively impact the triple deficits of the trade deficit, current account, and fiscal deficit. Since apart from macroeconomic fundamentals and the growth prospects of the firm and the industry, the capital market is also sentiment-driven, this war would negatively impact the BSE and NIFTY levels. But contrary to popular perception, extensive pessimism is unwarranted. It would be inappropriate not to factor in the strength and resilience of the Indian economy for a comprehensive assessment and perspective.
India’s Cognizable Dilemmas
As deterrence collapsed, the crisis escalated, the stakes rise higher necessitating the intervention of major world powers for peace in the multi-party West Asia conflict. India’s strategically time-tested relationship with both Iran and Israel is fraught with difficulties on the policy and operational fronts. Israel has long been a trusted defense and security partner. Iran is a major crude oil supplier and has shared concerns about terrorism, the Afghanistan landscape, and the geo-strategically significant Chabahar port.
One thing is certain, there are gathering storms, these are uncertain times, with difficult days ahead.
Note: This is an expanded version of the Op-ed first published in Financial Express on October 5, 2024.
ABOUT THE AUTHOR
Dr. Manoranjan Sharma is Chief Economist, Infomerics, India. With a brilliant academic record, he has over 250 publications and six books. His views have been cited in the Associated Press, New York; Dow Jones, New York; International Herald Tribune, New York; Wall Street Journal, New York.
